Cryptocurrency markets have been in the red for the major part of the year, and the recent discovery in Uganda might be the very thing helping the markets make an upwards trace.
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The Workings of Bitcoin and Gold
Bitcoin is the number one cryptocurrency by market cap in the world and bears significant promise to facilitate an entirely new financial system. Like any other asset, Bitcoin has a specific supply, and the price of the asset varies relative to the demand.
Cryptocurrencies follow various methods to establish a supply, from having limited supply, and unlimited supply to having the supply algorithmically determined. In the case of Bitcoin, it has a supply of 21 Million. Meant to be constant until the end of time.
Not all of these 21 Million Bitcoins are in circulation as of yet. Similar to gold, they have to be mined- by network validators in the case of cryptocurrencies. So far there are a little over 19 Million Bitcoins in circulation. The number 21 refers to the “cap”, or rather the upper bound of the number of Bitcoins that can be mined.
This makes Bitcoin a non-inflationary asset.
Since there will only be a limited amount of Bitcoin, after a point, the value of Bitcoin will be the only varying metric. Over time, Bitcoin will only increase in value and this is why prove to be a better “store of value” asset.
Gold too functions the same way. Historically speaking, the production and circulation of gold in the system has been pretty consistent with the requirements to keep a monetary system functional and this is why gold has been regarded as the best store of value for millennia.
It’s believed that gold has a limited supply and this is why, with time, will only grow in value. And because of the many similarities in properties, Bitcoin is often referred to as “digital gold”. And expected to replace gold, soon, as believed by many crypto proponents.
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Uganda’s Gold Discovery and Effect on Bitcoin
In recent news, by the Ugandan government, the country is sitting on 31 million metric tons of gold. And if this is true, it can increase the world’s supply of gold quite significantly, almost by an unhealthy amount. Consequently, that’ll make gold a less reliable asset in terms of a store of value, as the prices will soon plummet upon this sudden influx of gold in the system.
If that happens, Bitcoin clearly takes precedence and comes out to be the better, more reliable asset in comparison.
This would make awful news for the advocates of gold, however, at the same time, it can be celebratory news for the ones supporting crypto.
Microstrategie’s CEO Michael Saylor made a comment advocating Bitcoin in a tweet that read “Every commodity in the world has looked good in a hyperinflationary environment, but the dirty secret is you can make more oil, you can make more silver, you can make more gold […] Bitcoin’s the only thing that looks like a commodity that is scarce and capped.”
According to a few estimates on the internet, the recently discovered gold ore can result in 320,158 metric tons of refined gold, valued at $12.8 trillion. The absurdity of this estimation is apparent when you know the current above-ground amount of gold in the world is about 200,000 metric tons.
The plausibility of these numbers is under high scepticism.
Gold is not an easy asset to mine. To produce even a single gram of gold, a significant deal of gold ore is required. Typically, a high-quality gold mine will have 8-10 grams of gold per metric ton of gold ore, while a decent quality mine may have about 4-6 grams of it.
When we take the average to be 7, we factor in the size of gold ores mentioned by the Ugandan Government. The amount of gold to be potentially produced from the mines stands at 217 metric tons, sharing a huge contrast with the 317,158 tons of refined gold previously mentioned by Uganda’s Ministry of Energy and Mineral Development.
This newly discovered gold will add to about a 0.1 per cent increase to the world stock of refined gold, above ground.
Meaning, that gold still comes out to be a decent store of value, at least for now.
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Scepticism Around Bitcoin and its ‘Storage of Value’ Feature
On the other hand, the widely celebrated Bitcoin has received scepticism regarding its positioning as the better “store of value” asset. The scepticism comes from the reasoning that a good store of value must be uncorrelated to the stock market, while Bitcoin seems to be going the other way around.
Since its inception, although proposed as a decentralized asset, the increased participation of institutional investors has made Bitcoin more correlated with equities.
As explained by Eshwar Venugopal, assistant professor in the department of finance at the University of Central Florida, “People label Bitcoin as ‘digital gold’ because it was considered a hedging asset, especially against the stock market. This has not been true at least for the last three years,”
“When institutional investors enter such markets, their usual trading stop-loss limits apply and assets in their portfolio and by extension the market become positively correlated with each other. The fact that Bitcoin is bought and sold just like any other risky asset undermines the ‘digital gold’ tag given to it.”
For Bitcoin to become digital gold, it has to go through significant maturation. Not only do the prices need to be less volatile, entirely emulating market sentiments, but also the adoption needs to penetrate more users. Currently, the market penetration of Bitcoin is less than one per cent. And this is nowhere near enough for it to be considered a legitimate replacement for gold.
Bitcoin will need to, at the very least, have a user base as large as fiat currencies for it to be regarded as a better store of value.
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As of today, Bitcoin does not qualify to be a competing candidate. However, judging by the technicalities alone, Bitcoin shows complete promise to eventually be regarded as a better asset.
Most cryptocurrencies tend to emulate the patterns of Bitcoin. A win for Bitcoin would mean a win for crypto.
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